Contract killers

The legal relationship between employers and employees is constantly evolving and in the UK can be confusing, but a recent ECJ decision provides some clarity. By Tim Johnson

UK employment law continues to be heavily reliant on its roots in the 19th century. Hence the importance that is still attached to the nature of the contractual relationship between worker and employer.

Dacas v Brook Street Bureau (UK) Ltd (2004) illustrated the problems that the common law approach to determining employment rights can cause. Allonby v Accrington & Rossendale College & ors (2004), also an agency worker case, highlights the quite different approach to determining employment rights adopted in Europe. It could well be an indication of the shape of things to come.

The common law approach
It was only generally accepted that statute should redress the inequality in the bargaining power of employee and employer following the Second World War. Prior to that, and the legislation that followed, the rights of employees were primarily a matter of contract.

Statutory protection was initially provided to “employees” – that is, to people who could show they worked under a contract of employment. Thus the scope of unfair dismissal legislation extends only to employees, and an employee is defined as a “person who works under… a contract of employment” (Section 6 of the Employment Rights Act 1996).

This test is short and appears simple, but the appearance is misleading. At the borderlines it is very difficult to determine whether an individual is employed under a contract of employment or a contract for services. This was the issue in Dacas, which was decided by the Court of Appeal last March.

Brook Street had a contract with Wandsworth Council to supply the council with agency staff. After four years as a cleaner at one of the council’s hostels, Patricia Dacas was instructed to leave. She claimed unfair dismissal against both Brook Street and the council.

The Employment Tribunal, the Employment Appeal Tribunal (EAT) and the Court of Appeal all came to different conclusions about Dacas’s contractual status, and so to different decisions about whether she was entitled to claim unfair dismissal. The Employment Tribunal held that her contract with Brook Street was not a contract of employment, but a contract for services – in other words she was self-employed and so not entitled to claim unfair dismissal against either Brook Street or the council.

The EAT held that, although her contract with Brook Street stated that it was not a contract of employment, the facts showed that it was. There was sufficient “mutuality of obligation” and the agency exercised sufficient control. Therefore, she was entitled to claim unfair dismissal against Brook Street.

The Court of Appeal, by a majority, held that the Employment Tribunal had been correct to conclude that Dacas was not an employee of Brook Street and that she was not entitled to claim unfair dismissal against the agency. However, the Employment Tribunal had erred in concluding that because there was no written contract between Dacas and the council, she had not been employed by the council. The Court of Appeal held that it was quite possible that Dacas had a claim for unfair dismissal against the council.

Clearly, it is unsatisfactory that two specialist employment tribunals and the Court of Appeal all disagree on the correct analysis of Dacas’s employment status. It makes it very difficult for individuals such as Dacas to know if they have a claim. In addition, the reliance on contractual theory to decide whether individuals can claim unfair dismissal forces Employment Tribunals to become ever more legalistic and increases the possibility of appeal. After all, tribunals were established to decide issues quickly, efficiently and inexpensively.

Focus on the relationship
Unlike UK employment law, the European Community (EC) Treaty is based on the assumption that the world is divided into “workers” and “employers”, rather than “employees” and “employers”. This is more than a difference in terminology. EU law, like German law, looks at what individuals do to determine whether they are employed, rather than at the nature of the contract.

In Germany an employee is a person who performs dependent work for the benefit of another person on the basis of a civil law contract. Work is ‘dependent’ if the employer has the right to give instructions on the place, time and details of the employee’s work. The fact that an employee works ‘dependently’ distinguishes the work from that of an independent contractor or freelancer.

This approach is strikingly similar to that adopted by the European Court of Justice (ECJ) in January last year when, for the first time, it defined “worker” for the purposes of Article 141 (1) of the EC Treaty. The court said that a worker is:

l “… a person who, for a certain period of time, performs services for and under the direction of another person in return for which he receives remuneration.” (Allonby, paragraph 67.)
l … to be distinguished from an “independent provider of services” by the fact that the latter is “not in a position of subordination with the person who receives the services.” (Paragraph 68.)
The ECJ went on to say: “Provided that a person is a worker within the meaning of Article 141 (1) EC, the nature of his legal relationship with the other party to the employment relationship is of no consequence.” (Paragraph 70.)
In other words, when determining whether an individual is entitled to protection under Article 141, it does not matter whether they are employed under a contract of employment or a contract for services.

Pressure for change
The fundamental analysis is the same in Germany, the EU and the UK. Each divides workers into those who need protection and those who do not because they are sufficiently independent. The difference is that, in the context of unfair dismissal, the UK decides the issue of dependence by analysing the nature of the contract rather than by assessing the nature of the relationship. This seems to be an unnecessary additional step that will become increasingly difficult to justify, especially if it continues to result in confusion.

Tim Johnson is a partner at Kilpatrick Stockton, which represents the respondents (other than the Secretary of State) in Allonby